With catastrophic weather events hitting hard across the country, 2022 was ranked the third worst year for insured losses in Canadian history.
Unlike other years, in which a single dramatic event made up a significant percentage of the losses, 2022 saw a variety of major catastrophic events wreaking havoc across the entire country. Ontario was one of the hardest hit provinces, weathering a May derecho, June thunderstorms and a July tornado, as well as the usual wildfires.
In the past decade, the destruction caused by natural disasters has had a cumulative effect on the property insurance market, driving up rates and reducing capacity for all property insurances — including builder’s risk.
The May derecho that hit Ontario and Quebec caused $1 billion in insured losses, the most significant cost from 2022 overall. The hurricane that hit the Eastern provinces was close behind, with roughly $800 million in losses. Globally, insured losses from floods between 2011 and 2020 reached $80 billion, twice the losses from the previous decade, and those statistics don’t include losses caused by other catastrophes such as fires and tornadoes.
The increasing number of weather events has thrown insurers. Their outdated risk models have led to a tightening of the market, reducing capacity for insuring builders (and others) against these risks.
Compounding pressures plague the marketplace
The result? Between the uncertain economy and the insurance industry’s reduced capacity for risk, the entire construction industry is in turmoil. Builders already under pressure from a shortage of labour and materials, as well as ongoing supply chain delays, are now facing significant challenges in securing adequate builder’s risk coverage to protect their upcoming projects.
Of course, even before the derecho and the stormy summer, builder’s risk prices were already elevated, largely due to losses on wood frame projects. Huge growth in the number and value of construction projects, especially in the GTA, has now outpaced the industry’s capacity to insure the risk.
Today, builders risk rates are inconsistent on many projects. In non-CAT risk zones, capacity remains a challenge. In areas with higher risk, rates could be up as much as 100 per cent leaving lenders concerned about whether there’s enough capacity to support all the builders seeking coverage.
Best practices for managing risk
The construction industry is in a tough spot. Without sufficient insurance coverage, builders may need to postpone projects – disappointing investors and future homeowners. Lenders are reassessing the situation, too. But no one wants to be left responsible when a catastrophic storm comes through and damages a building under construction.
Consider these best practices to protect your construction firm and your upcoming projects:
Build it once, build it right. Taking shortcuts to save money in the short term often doesn’t work out the way you imagined. If you are working in an area that’s known to have higher risk of flooding or other natural disaster, be sure you meet or exceed the local building codes. This helps ensure that a dramatic storm or other disaster won’t destroy your project entirely, minimizing the likelihood of a major claim.
Watch your reputation. Take care to present yourself the right way. With insurers reluctant to offer builder’s risk policies, those builders and contractors with a successful track record will be more likely to secure coverage at a reasonable price. Be sure you tell your risk management story effectively, including any steps you have in place to reduce water intrusion, theft, and fire. Examples of previous projects that hit a roadblock and recovered well are helpful too. Share as many details as possible to secure the coverage you want.
Share with your partners. If your project is in a different location or significantly larger than previous projects, you may be surprised by the cost. It’s a good idea to consult with a construction insurance expert to identify issues that may impact insurability. Share details about your upcoming building projects and their timelines, as these details often contribute to the cost. Start early to ensure your management team has time to adjust to the information you gather.
In today’s tough insurance market, builders can’t afford to make mistakes – the costs are simply too high. Many builders find greater success through collaboration: talking with insurance experts, such as a broker or underwriter, can prove invaluable to the process. The experts understand the nuances of the market, as well as specific steps you can take to improve your own circumstance. A good broker can provide the right kind of support to ensure you can continue building not only your current project, but also the ones that come after.
Simon J. Fenn, CIP, is senior vice president at Hub International. He has more than 44 years of risk management and insurance experience in top insurance brokerages, companies and reinsurance companies.
